S&P expects states to curtail debt issuances

Global rating agency, Standard and Poor's expects debt issuance by state governments in India to decline to about Rs 1,12,800 crore from Rs 1,26,000 crore in 2005.

In its report titled "Indian local-government borrowing to decline in 2006", S&P attributed the 10 per cent fall in borrowings to reduced revenue deficits and curtailment of capital expenditure, which will result in smaller fiscal deficits.

Accordingly, S&P has predicted that the total debt outstanding could reach Rs 7,10,000 crore by end of 2006.

S&P's credit analyst Ping Chew said, "The Indian debt market is dominated by the central government borrowing, but issuances by states are also significant, after central government and corporate bonds."

Besides deficit financing, the report pointed out that regional governments have also taken the debt route to honour state guarantees.

S&P opined that although the combined outstanding contingent liabilities of about $50 billion for 14 major states in 2005 are not likely to decline in the near term, though new contingent liabilities could be curtailed.

These liabilities largely comprised guarantees for borrowings by financially weak state public enterprises, which were eventually realised through state budgets.

One of the key developments affecting state debt issuance is the Twelfth Finance Commission (TFC), a centre-state fiscal review body.

The likely consequences of the TFC's main recommendations include greater flexibility for states to decide on the proportion of market borrowings and central government loans, as well as disintermediation in market borrowings.

S&P simultaneously released a report stating that Asia-Pacific borrowings in 2006 are likely to decline by 2.8 per cent to $1.75 trillion, from about $1.8 trillion in 2005.

"The main reason for a slower pace of issuance appears to be a general trend of increased fiscal consolidation by governments in terms of GDP, especially among some of the largest borrowers," said S&P's credit analyst Agost Benard.

The projected decline in new issuance will be a continuation of the slowing trend among sovereigns in 2005, after a peaking of activity in 2004.